Equity investment triggers for the financial year 2017-18

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As the Nifty stands at a new high and the Sensex just a few hundred points shy of a new high, the question arises about the outlook for equities in the coming financial year. While at a very broad level, valuations may be at the upper end of the historic band, there could be some key triggers to help the equity markets in the coming financial year. There are 8 key factors that could drive the demand for equities in the financial year 2017-18…

8 factors that could drive demand for equities in India in 2017-18…

Global liquidity may continue to pour into India in the coming financial year. The reasons are not far to seek. Even after the pain of demonetization, the Indian economy is expected to grow above 7.5% in the coming financial year. What is more; this growth will be achieved without compromising on fiscal deficit targets. This is likely to keep the FPIs interested in Indian equities at a fundamental level. If the FPI inflows in the month of March are anything to go by, then the FPI inflows are likely to continue in a bigger way in the coming fiscal year.

The strength of the INR could be a key factor that could support FPI inflows into equities, apart from the relative valuation attractiveness of Indian equities. A strong rupee works in favour of global investors since their equity returns get enhanced by a strong currency. Ironically, the INR has strengthened from 68/$ to almost 64.6/$ at a time when the consensus estimate was that the INR would depreciate below the 72/$ mark. By wrongly anticipating the INR, most FPIs actually lost out on the rupee appreciation. Hence, the left-out feeling is leading to a surge of FPI flows into India and will continue into the new fiscal.

Oil is likely to stay reasonably priced and that will ensure that the dividends of cheap oil will continue. Over the last 30 months, more than a trillion dollars of wealth transfer has happened from oil producers to oil consumers. India, which depends on oil imports for nearly 75% of its requirement, has been one of the obvious beneficiaries of low oil prices. With the US stockpiles high, global storage dwindling and millions of shale production in the sidelines, prices of Brent crude are unlikely to shoot up any time soon. That will benefit the Indian mid-cap companies in particular.

Domestic liquidity could continue to flow into equities due to the TINA factor. There is no alternative (TINA) has been a key driver of domestic flows into equities. Domestic mutual funds are flush with funds due to a sharp rise in the number of SIPs. Retail investors are expected to infuse nearly $75 billion into the Indian equity markets and most of these funds are likely to flow into equity mutual funds. The way MFs sustained inflows into equities between October 2016 and January 2017 underlines that they have arrived as critical players.

The alternatives to equity investing have been dwindling in India. Gold has become too volatile and does not assure that value will grow consistently. With the government clamping down on benami properties and real estate transactions, investors are getting increasingly wary of property market. Bonds and FDs are tax-inefficient and the yields are just about sufficient to cover the risk of inflation. Under these circumstances, only equity and equity-linked products remain as veritable investment options to create wealth. That could be a key driver for domestic demand for equities.

Stability and continuity at the centre and states could be a major sentimental trigger for Indian equity markets. The recent emphatic victory in states like UP, Uttarakhand, Goa and Manipur have set the tone for a domination of the BJP across key states in the Hindi belt. This augurs well for continuity of reforms process post the 2019 elections. This will be a great positive especially for global investors looking for drastic reforms.

GST could be a game changer for Indian markets. The GST overall is likely to boost GDP growth by 2% per annum. At the current GDP level of $2 trillion, this additional growth is likely to translate into $40 billion per annum. This is likely to show up in the form of additional GDP from the coming year and that will be positive for Indian equities. But the real benefits of GST may be indirect. The GST will create a national tax network that will introduce efficiencies in the way companies manage their logistics. The entire logistics rationale of Indian companies will shift from being tax-driven to being driven by commercial considerations. The actual impact of this move on valuations could be huge.

Demonetization and digitization could be a major game changer for Indian equities. While demonetization has pushed large chunks of the informal economy into the formal mode, digitization is likely to expand the ambit of banking services substantially. In the process this could create a huge market across smaller towns and rural areas. By prising open huge markets, the combination of demonetization and digitization could push large parts of the parallel economy into the economic mainstream.

To cut a long story short, a combination of positive macros, global cues and company level factors are likely to favour Indian equities in the coming fiscal year. With India’s GDP growth likely to continue to outperform China, the growth advantage is likely to translate into greater interest in Indian equities. That may be the big story for fiscal year 2017-18.

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